RBI's Economic Capital Framework: Some suggestions



RBI’s Economic Capital Framework (ECF)*
Some suggestions for the Panel to consider
This refers to the report “Bimal Jalan to head expert panel on Economic Capital Framework” (Business Line, December 8). It is heartening to find that RBI has shown the magnanimity and chosen to include both Jalan and Rakesh Mohan in the Economic Capital Framework (ECF) Panel, putting to rest the speculations in the media about differences of views between GOI and RBI as to who should man the panel.
The terms of reference given to the Panel are broad enough to cover various aspects of the controversy about the capital framework of RBI which became almost a spar between two schools of thought on the holding of reserves by India’s central bank.
Here three or four aspects deserve the Panel’s attention. They are:
a)    RBI’s share capital has remained static at Rs 5 crore since inception (1935). Is there a case for raising this to a decent level, say, the equivalent of US $ 500 billion or upwards? If yes, whether this should be done by additional contribution by GOI or conversion of existing reserves?
b)    Whether RBI should create a ‘Capital Protection Fund’ to insulate its capital from erosion in value? If so whether the present provisions of RBI Act on ‘provisions’ will cover creation of such a fund or whether an amendment to the Act is necessary?
c)      Is it not prudent accounting practice for RBI to protect the value of its gold and foreign securities holdings against value erosion, instead of generating income by taking advantage of rupee depreciation? Actually the fallacious argument in Economic Survey, 2016-17 about ‘surplus reserves’ emanated from certain wrong notions about RBI’s accounting practices in regard to revaluation of non-rupee assets (gold, forex securities etc) which were promptly clarified by the then RBI Governor Raghuram Rajan and the ES suggestion was not pursued. Dr Rajan did give more elucidations on the subject in his Delhi speech on September 3, 2016.
Hopefully, all these and more will get clarified when the expert panel on ECF submits its report.
  M G Warrier, Thiruvananthapuram
*Business Standard published a slightly edited version of this letter on December 28, 2018

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